Although engagement agreements are not required legally, they are strongly encouraged. A properly drafted engagement agreement can serve as a helpful risk management tool by establishing a legal framework for the relationship with a client. An engagement letter can discourage a client from asserting a meritless claim and can be useful in defending such a claim. The service or type of engagement should determine the terms and provisions to be included in the engagement agreement.

Majority of accountants’ professional liability claims involve tax services

The failure to utilize an engagement agreement can become an issue in the event a professional liability claim is made against an accountant. The claims often involve disputes between the accountant and the client or purported client, over what services the accountant was to provide the client, or even if there was a retention at all.

It is common for potential clients to fail to deliver the requisite records to the accountant in enough time to prepare and file a tax return or perform another service. The engagement agreement can properly address this issue when the requisite records are not provided by the client on time. There can also be confusion over whether the accountant is providing any tax planning advice beyond just the preparation of a return and who is responsible to file a completed return. An engagement agreement can address such responsibilities and avoid such issues.

Even with long-term clients, where an accountant provides services for a client every year, disputes can occur without an annually executed engagement agreement that clearly describes the scope of work. For example, a long-term client requests advice from the accountant on the sale of the client’s business that year and any possible tax consequences. Following the sale of the business, the client incurred significant unanticipated tax charges and penalties. While the accountant claimed he was only retained each year for the preparation of tax returns, the client claimed that the accountant failed to provide proper tax advice concerning the sale of the business. The sale of the business agreement in that year went beyond the scope of the usual tax preparation work the accountant completed each year. However, without an engagement agreement, it was unclear if the additional work had been agreed to by the accountant.

Elements of a well-drafted engagement agreement for accountants

To help accountants manage their risks of a professional liability claim, the following are some of the elements that should be addressed and included in a well-drafted engagement agreement to help avoid client confusion and misunderstandings that can lead to claims.

• Identify client, fees and timing of services. The engagement agreement should identify all clients to the agreement, whether individual or corporate. The fees should be explained and the fee payment schedule should be outlined. In addition, it is important to state when supporting documents need to be provided, who is responsible for filing the return and when signatures are required for both the engagement agreement and the return.
• Clearly describe the scope of the work. The scope of work section of the agreement is critical to spell out exactly what work the accountant has agreed to perform for a client. The agreement should also indicate any limitations of the services, such as not providing any tax planning advice or defense if a return is challenged by a government agency. It is helpful to also address that if additional services are needed, the accountant and the client need to agree to the work and any additional fees in writing.
• Identify client responsibilities. The agreement should identify the client’s responsibilities, such as the required documentation for the anticipated work and when those documents must be provided. The client must agree to the accuracy and completeness of the records provided. If applicable, the agreement should note the client is responsible to identify if they hold any interests or assets in foreign countries and disclose any additional filing requirements in those other jurisdictions.
• Specify use of third party service providers, electronic data communication and storage. The agreement should specify how communications will be made with the client, how electronic data will be stored and for how long and allow for the use of third party vendors for storage and preparation of documents.
• Use engagement agreements that are limited in time. Engagement agreements should be limited in time and be renewed each year. It is not recommended that an accountant use an “evergreen” engagement agreement, which is an agreement without a clear end of services. An engagement agreement should typically have a beginning and an end of the services performed by the accountant. This forces the accountant and the client to review the scope of work at least annually. The client should have time to review the engagement agreement before executing. The accountant should require the client to sign the engagement agreement before any services are performed. The accountant should retain the original of the executed engagement agreement and provide the client a copy.

Accountants can minimize their risks by communicating regularly with clients. Regular communication can help solidify the accountant-client relationship and help the accountant learn if the client’s needs have changed from the previous year. By utilizing well-drafted engagement agreements, accountants can manage the risks and avoid misunderstandings and confusion that can lead to costly professional liability claims.

This material is provided for informational purposes only and does not provide any coverage or guarantee loss prevention. The examples in this material are provided as hypothetical and for illustration purposes only. The Hanover Insurance Company and its affiliates and subsidiaries (“The Hanover”) specifically disclaim any warranty or representation that acceptance of any recommendations contained herein will make any premises, or operation safe or in compliance with any law or regulation. By providing this information to you. The Hanover does not assume (and specifically disclaims) any duty, undertaking or responsibility to you. The decision to accept or implement any recommendation(s) or advice contained in this material must be made by you.

LC 2018-530 (11/2018)